Archive - Apr 9, 2013

It's important to draw a line between two very different flavors of banker: "restrained" (Dr. Jekyll) and "unrestrained" (Mr. Hyde). The key feature of a sustainable, non-parasitic banking sector is that banks and bankers have "skin in the game," i.e. they personally suffer losses when their loans and bets go bad. This is the essence of moral hazard: the separation of risk from consequence. Put another way, those who are insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government: this is known as "privatizing profits and socializing losses." The Federal Reserve, the Obama Administration, the housing agencies and the U.S. Treasury are all offering bankers and financiers high-payoff tables that require no skin in the game. No wonder our system is dominated by the unrestrained bankers, sociopathological Mr. Hydes who offer a few coins in compensation for running down the nation.

As SF Fed's John Williams notes (here), cash is king, but the strange thing is that while credit/debit transactions rise exponentially, the cash in circulation is also rising at a rapid pace. So where does all the cash go? The short answer is into large-denomination bills and out of the country by his findings. While low denomination bills suffer (as we discussed here) it is worth asking who is 'hoarding' the $100 bills? This is the question that BofAML asks in Europe as the huge EUR500 Bill (the developed world's highest value note in circulation) remains in great demand (apparanelty by shady offshore types). This is not good news for the central banks of the world as they run dry of monetary policy tools to drive velocity in money (or spending). BofAML's proposal: Ban the EUR500 Bill; force those shady people who 'stack' these high denomination bills to spend that money into circulation. This would appear to be the latest 'capital control' strawman, 'floated' to eliminate the people's right to keep cash segregated from a banking system and out of broad electronic circulation. So in both the US and Europe, high denomination bills are being hoarded (or exported to 'safe' havens) as Williams notes, "around the world, during periods of political unrest or war, cash - especially the currency of a stable country... - is seen as a safe asset that can be spirited out of harm’s way with relative ease." This, of course, is not what the elites want - and we suspect a "ban the EUR500 Bill" legislation will be coming soon to the EU Commission.

1,135 Borrowers to Receive Max $125,000 Payment in Fraudclosure Settlement

Following yesterday's note on the near-record level of shorts in Silver futures, it is perhaps just a coincindence that spot silver prices are surging today - their biggest jump in seven months. Gold is also having one of its best 3-day runs in the last nine months, yet both moves are peanuts compared to what is going on in the "electronic" asset arena, namely the policy vehicle formerly known as "stocks" and BitCoin, both of which are racing for the title of most insane parabolic bubble ever.

Curious why the Dow Jones just hit new all time highs? Here's a partial list of recent economic events:

• Markit US PMI    Miss
• ISM Manufacturing    Miss
• ISM New York    Miss
• Vehicle Sales    Miss
• ADP Employment    Miss
• ISM Services    Miss
• Challenger Job Cuts     Miss
• Initial Claims    Miss
• Trade Balance    Beat
• Non-Farm Payrolls    Miss
• Hourly Earnings    Miss
• NFIB Small Business    Miss
• Wholesale Inventories    Miss

And the festival of greater fiat fools...

A few days ago, Bloomberg released an article in which it described the lamentations emanating from the Primary Dealers whose role in bond purchases is being increasingly undercut by Direct bidders who get to buy US paper directly from the Treasury and without Dealer intermediation. Well, no such worries in today's just concluded $32 billion auction of 3 Year paper, which closed moments ago at a high yield of 0.342%, the lowest "high yield" in 2013 and a Bid To Cover of 3.238, the lowest since September 2011. But what was most notable is that the combined take down of Directs and Indirects was a tiny 35.1%: the lowest non Dealer interest since January 2009. Naturally, the Dealer take down was the inverse or 64.9%, which also was the largest since January 2009. Obviously all this paper will be promptly sold back to the Fed, but any artificial (and inaccurate) concerns that Dealers are not getting their due allocation of paper can now be put to rest.

While the 2012 Deja-Vu chart analog continues to play out in far too similarly scary manner than many had believed possible, a glance at the catalysts over the two months that form the 'tops' should also send a shiver down the spine of the momentum believers. In 2012, the first dip was the Greek default and restructuring (a Europe-based crisis risk flare); that dip was bought (of course) as "the worst is behind us," only to see a miss in US non-farm payrolls confirm the "it's different this time," hopers were wrong once again. In 2013, the Italian election created a Europe crisis risk-flare, which was bought (of course) as "the ECB has our back", and then a month later, the non-farm payroll prints at a dismal level. For now, we remain hopefully bid on a sea of central bank liquidity (just as we were in 2012 thanks to ECB's LTROs) but what happens when 'markets' realize the hole is bigger than the central banks can fill?

A sign of "economic and political turmoil"

Despite the mainstream analysts' calls for a "great rotation" by investors from bonds to stocks - the reality has been quite the opposite.  While the 10-year treasury rate rose from the recessionary lows signaling some economic recovery in 2009; the decline in rates coincided with the evident peak in economic growth for the current cycle that begin in earnest in 2012 - "With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk." Despite the calls for the end of the "bond bubble" the current decline in interest rates are suggesting that the real risk is to the economy.  The aggressive monetary intervention programs by the Federal Reserve, along with the ECB and BOJ, continue to support the financial markets but are gaining little traction within the real economy. Of course, this is likely why the current quantitative easing program is "open-ended" because the Fed has finally realized that there is no escape.   The next economic crisis is coming - the only questions are "when" and "what causes it?"  The problem is that next time - monetary policy might not save investors.

If you think this cannot happen in the US, think again. The FDIC has already proposed legislation that would allow it to TAKE CONTROL OF A BANK IT DEEMS SYSTEMICALLY IMPORTANT AND WRITE DOWN YOUR SAVINGS ACCOUNTS as part of the bail-in.

A few hours ago, a major 6.1 magnitude quake struck in Iran once again, some 100 km away from Bushehr - location of Iran's only nuclear power plant. According to subsequent reports, at least 30 people have been killed and nearly 600 injured, although at least for now the official version is that the power plan was undamaged. From Al Jazeera: "Fereydoon Hasanvand, governor of Bushehr, said the nuclear plant was undamaged by Tuesday's earthquake. "No damage at all has been caused" to the plant, he told state television. The Russian company that built the nuclear-power station, 18km south of Bushehr, said the quake had been felt there but that operations at the plant were not affected. "The earthquake in no way affected the normal situation at the reactor." Of course, as TEPCO and Japan so vividly and glowingly in the dark demonstrated, when it comes to nuclear power plants, the last thing to be released, long after the alpha, beta and gamma rays, is the truth. We doubt this time would be any different.

Wondering why the Italian bond market has been stable and "improving" in recent months, with yields relentlessly dropping as a mysterious bidder keeps waving it all in despite the complete political void in the government and what may be months of uncertainty for the country, and despite both PIMCO and BlackRock recently announcing they are taking a pass on the blue light special offered by BTPs? Simple. As the Bank of Italy reported earlier today, total holdings of Italian bonds by Italian banks hit an all time record of €351.6 billion in February.

Nuclear Regulators Just “Rolling the Dice”

When European governments buys goods and services they often do not pay their suppliers in full. Many countries in the euro area are in arrears. These are not included in the Maastricht definition of debt. Italy is the most egregious and this in turn has aggravated the credit crunch for the SMEs and increase the non-performing loans at banks.